Commodities Blog

Oil and Gasoline Prices

From 2002 - 2008, the price of a gallon of gasoline averaged $0.22 more than a gallon of crude in the futures market, and the price of gasoline in the retail market averaged $0.99 more than a gallon of crude in the futures market. The main cost difference is attributed to the cost of refining, with the rest going to distribution, marketing, and taxes. Only 40% of a barrel of crude oil (1 barrel = 42 gallons) goes to making gasoline, while the rest goes to make other products, mostly diesel fuel. The United States does not use much diesel fuel, but the market for diesel fuel is much larger in the rest of the world where it is used to generate electricity and to power industrial production. Because oil is much less volatile than gasoline, it is much easier to store. Therefore, when there is concern about a supply problem in the near future, more oil is bought for storage, but not gasoline, since it evaporates readily. Hence, potential supply problems will cause the price of oil to spike more than gasoline prices.

Oil Is Cheap. Why Is Gas, Which Is Made From Oil, Even Cheaper?

Gasoline Components History - The relationship of the cost components of delivering gasoline to the gas station and the amount charged at the gas pump.

OPEC's Influence on Oil and Gasoline Prices

It is difficult for OPEC to raise oil prices, because of the benefit of cheating to the individual countries. Countries cheat because they have different economies, different needs for money, different projections for future demand, and different production costs—a good portion of it fixed. The Saudis, with a 60-year supply of oil, wants to keep prices relatively low so that the world maintains its dependency on oil; otherwise the world will invest in alternative resources which may eventually reduce the need for oil to a very low level. Iran and Angola, however, need the money, and so, aren't likely to abide by quotas.

OPEC can't directly monitor the output of any single nation, and even if it could, OPEC does not have the legal authority to enforce quotas. Nonetheless, publishing quotas often shapes the expectations of the market, which can drive prices higher at least temporarily, even if production isn't cut to the desired quota.

Can OPEC Force Oil Prices Up?

Futures Contract for Uranium will Debut on NYMEX

Uranium Contract To Debut on Nymex - WSJ.com

Presently, there is no futures contract for uranium, but there soon will be at the New Your Mercantile Exchange. Naturally, this contract will be cash-settled. The demand for uranium has been growing substantially as countries look to nuclear power to replace more expensive oil. Spot price in industry contracts has grown from @22.50 per pound in March, 2005 to $113 in April, 2007, and annual demand has exceeded supply by 50%.

Broad Commodity Exchange-Traded Funds (ETFs)

There are 2 new ETFs that track the broad commodity index: Deutsche Bank listed its PowerShares DB Commodity Index Tracking Fund (DBC) on the American Stock Exchange in January, and Barclays Global Investors introduced its iShares GSCI Commodity-Indexed Trust (GSG) on July 21. The Deutsche Bank PowerShares fund, structured as a commodity pool, invests in future contracts with the following proportions:

Pie Chart: Percentage of the different commodities composing the Deutsche Bank PowerShares DB Commodity Index Tracking Fund.

The fund also holds U.S. Treasuries, using the interest to pay the 0.75 management fee.

The iShares fund is based on the Goldman Sachs Commodity Index (GSCI), which tracks 6 energy products, 5 industrial metals and 2 precious metals, 8 agricultural products and 3 livestock products, but because the GSCI weights commodities by world production, it is now heavily weighted in energy.

Neither fund takes delivery of the commodities, but rather invests in futures contracts, continually rolling them over.